What Is the Relative Vigor Index?
The Relative Vigor Index (RVI) is a momentum indicator used in technical analysis. It measures the strength of a trend by comparing a security’s closing price to its trading range while smoothing the results using a simple moving average (SMA).
The RVI’s utility is based on the observed tendency for prices to close higher than they open during uptrends, and to close lower than they open in downtrends.
Key Takeaways
- The Relative Vigor Index (RVI) is a technical momentum indicator.
- The RVI uses a simple moving average to smooth out price fluctuations, allowing traders to more easily identify trends.
- The RVI oscillates across a pre-determined center line rather than a banded trend.
- Divergences between the RVI indicator and price suggest there will be a near-term change in the trend.
- The RVI is most useful in trending markets. In range-bound markets, it risks generating false signals.
What Does the Relative Vigor Index (RVI) Tell You?
The RVI indicator is calculated in a way similar to the stochastics oscillator but it compares the close relative to the open; traders expect the RVI value to rise as the bullish trend gains momentum, as, in an uptrend, a security’s closing price tends to be at the top of the range while the open is near the low of the range. In an uptrend, prices often close higher than they open, while in a downtrend, they often close lower.
The RVI is interpreted in the same way as many other oscillators, such as moving average convergence-divergence (MACD) or the relative strength index (RSI). While oscillators tend to fluctuate between set levels, they may remain at extreme levels over a prolonged time, so interpretation must be undertaken in a broad context to be actionable.
The RVI is a centered oscillator, typically displayed above or below the price chart, moving around a central line rather than the actual price. Using the RVI indicator in conjunction with other forms of technical analysis yields the highest probability outcomes.
Example of How To Use the Relative Vigor Index (RVI)
A trader might examine potential changes in a trend with the RVI indicator by looking for divergences with the current price and then identifying specific entry and exit points with traditional trendlines and chart patterns.
The two most popular trading signals include:
- RVI Divergences: Divergence between the RVI indicator and price suggests a near-term change in the trend, following the direction of the RVI’s trend. If a stock price rises while the RVI indicator falls, it predicts the stock will reverse in the near term.
- RVI Crossovers: The RVI has a signal line often based on price inputs. A crossover above the signal line is a bullish indicator; below it, a bearish signal. These crossovers aim to be leading indicators of future price direction.
The RVI works best in trending markets as it can generate false signals in range-bound markets. Results improve by setting longer-term lookback periods to reduce the impact of whipsaws and short-term countertrends.
Key Example for Practical Understanding
- Choose an N period to examine.
- Identify the open, high, low, and close values for the current and prior bars.
- Calculate SMAs for the NUMERATOR and DENOMINATOR over the N period.
- Divide the NUMERATOR value by the DENOMINATOR value.
- Use the result within the signal-line equation and plot it on a graph.
Understanding Technical Analysis in Trading
Technical analysis is a trading strategy that assesses statistical trends to evaluate and make investment decisions. It uses price and volume data to analyze how trends might change, differing from fundamental analysis focusing on company data.
Bottom Line
The Relative Vigor Index (RVI) is a momentum indicator that smooths out price fluctuations using a simple moving average. When the RVI diverges from the asset price, it indicates a likely trend change. It performs best in trending markets and risks generating false signals in range-bound markets.
Related Terms: momentum indicator, simple moving average, stochastics oscillator, trendlines, trading signals.
References
- Trading View. “Relative Vigor Index”.
